“Another man’s junk is another man’s treasure” is an often-used adage with respect to discovering value and in the investment arena, it’s locating profitable opportunities where others would not normally find them. Junk bonds or high-yield bonds have long been considered investable assets that make the majority of investors turn the other cheek with their below investment-grade debt, but for savvy investors, treasures can by had by sifting through this mass of junk bonds.
As opposed to allocating investment capital directly into junk bonds, ETFs can used for high yield exposure to these bonds while minimizing the credit risk. With their high yields with respect to their investment-grade corporate bond counterparts, junk bonds can also help hedge rate risk, especially with the Federal Reserve primed for more rate hikes in September and December.
“These ETFs are an efficient way to get fixed income market exposure, especially in highly desirable sectors such as international, emerging markets and high yield,” said Paul Mottola, Head of Capital Markets at Incapital. “Plus, the multiple holdings within a bond ETF can accomplish many important investment objectives, such as issuer diversification.”
With that, here are five fixed-income ETFs that give exposure to high-yield bonds without the added risk of investing directly in the debt issues themselves.
1. iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG)
HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality. Investors who have been able to forego the credit risk have seen total returns of 3.95% the last three years and 1.22% the past year based on Yahoo! Finance performance figures.
2. SPDR Blmbg BarclaysST HY Bd ETF (NYSEArca: SJNK)
SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade. SJNK has returned 1.20% year-to-date, 2.94% the past year and 3.76% the last three years.
3. iShares 0-5 Year High Yield Corp Bd ETF (NYSEArca: SHYG)
SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index, which is primarily composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. Like SJNK, debt maturities are shorter, thereby helping to hedge some credit risk, but issues are still less than investment-grade. Nonetheless, SHYG has managed to return 1.13% year-to-date, 2.86% the past year and 4.14% the last three years.
4. iShares Interest Rate Hdg Hi Yld Bd ETF (NYSEArca: HYGH)
The prime focus of HYGH is to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. In order for HYGH to achieve its investment objective, it invests 80 percent of its net assets in U.S. dollar-denominated high yield bonds and also incorporates short positions in U.S. Treasury Securities. 45.84 percent of HYGH’s holdings include yields tied to a fixed-income portfolio of bonds with a BB credit rating and another 40 percent with a B credit rating–more credit risk in lieu of higher yields as opposed to bonds with credit ratings higher than BB. As an example, high yield bonds with a BB credit rating have generated returns of 23.5 percent according to the ICE BofAML US High Yield BB Effective Yield index below.
5. ProShares High Yield—Interest Rate Hdgd (BATS: HYHG)
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade. By targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
For more trends in fixed income, visit the Fixed Income Channel.